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If you are looking to invest in Fuel Tech Inc’s (NASDAQ:FTEK), or currently own the stock, then you need to understand its beta in order to understand how it can affect the risk of your portfolio. FTEK is exposed to market-wide risk, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks, and is measured by its beta. Not every stock is exposed to the same level of market risk, and the broad market index represents a beta value of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
What is FTEK’s market risk?
Fuel Tech’s beta of 0.84 indicates that the stock value will be less variable compared to the whole stock market. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. Based on this beta value, FTEK appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Could FTEK’s size and industry cause it to be more volatile?
FTEK, with its market capitalisation of US$28.28M, is a small-cap stock, which generally have higher beta than similar companies of larger size. In addition to size, FTEK also operates in the commercial services industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a high beta for the small-cap FTEK but a low beta for the commercial services industry. It seems as though there is an inconsistency in risks portrayed by FTEK’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
Is FTEK’s cost structure indicative of a high beta?
During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I test FTEK’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Given that fixed assets make up less than a third of the company’s total assets, FTEK doesn’t rely heavily upon these expensive, inflexible assets to run its business during downturns. Thus, we can expect FTEK to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. This is consistent with is current beta value which also indicates low volatility.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto FTEK. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. What I have not mentioned in my article here are important company-specific fundamentals such as Fuel Tech’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
Financial Health: Is FTEK’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
Past Track Record: Has FTEK been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of FTEK’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.